Is your estate worth more than the Inheritance Tax threshold?
If your estate is worth more than £325,000 (in tax year 2010/11) then you may find you have an Inheritance Tax (IHT) liability. So, it is important that you make the most of the exemptions during your lifetime that allow you to make gifts to other people and not have to pay tax on them when you die.
Here are four gifts that are exempt from Inheritance Tax.
One of the easiest ways to avoid Inheritance Tax is to give away gifts during your lifetime. You are able to give away gifts up to the value of £3,000 in each tax year and these gifts will be exempt from IHT when you die.
In addition, you can carry forward any unused part of your annual £3,000 allowance to the following tax year.
Gifts to ‘exempt beneficiaries’
It is possible to make gifts to certain people and organisations either during your lifetime or in your will. You won’t pay any IHT on ‘exempt gifts’ to:
- A qualifying charity
- Your wife, husband or civil partner (as long as they have a permanent home in the UK)
- National institutions such as the National Trust, museums and universities
- A recognised UK political party
Remember that any gifts you make to a partner that you are not married to (or in a registered civil partnership with) are not exempt.
You are also able to make small gifts up to the value of £250 to as many people as you like. You can’t use the ‘small gifts’ exemption in addition to another exemption when giving to the same person, and you can’t give a more valuable gift and claim for the first £250.
Potentially Exempt Transfers
It is possible to gift anything to an individual and not pay any Inheritance Tax as long as you live for seven years after making the gift. These are called ‘potentially exempt transfers’.
If you make a gift and then die within seven years, and the gift is valued at more than the IHT threshold, you or your estate will have to pay Inheritance Tax. If you die within seven years and the total value of gifts is lower than the IHT threshold, the value of the gifts is added to the total value of your estate. Any IHT due will have to be paid.
The rules for ‘potentially exempt transfers’ can be quite complicated. For example, if you gift your home to your children but keep living there rent-free, the gift may not be ‘potentially exempt’.
If you die between three and seven years after making a gift, any Inheritance Tax due on that gift is reduced on a sliding scale under an exemption known as ‘Taper Relief’.